In the sevententh-century Britain was running out of trees to build houses. The problem was solved by the increased use of bricks. In the late-nineteenth century we were all running out of whale oil to light out lamps. It was a problem solved by the exploitation of a new resource: oil.

The stone age didn't end because they ran out of stones; it ended because they went on to exploit better things -- and sitting here as a beneficiary of the Industrial Revolution I'm very glad they did. Given that it's the process of invention and exploitation of resources begun back then that keeps us all alive today, it's important to have some basic understanding of how resources are produced and exploited -- when properly and freely done, it's almost seems as if an invisible and benevolent hand was guiding production.

the resources provided by nature, such as iron, aluminum, coal, petroleum and so on, are by no means automatically goods. Their goods-character must be created by man, by discovering knowledge of their respective properties that enable them to satisfy human needs and then by establishing command over them sufficient to direct them to the satisfaction of human needs.

For example, iron, which has been present in the earth since the formation of the planet and throughout the entire presence of man on earth, did not become a good until well after the Stone Age had ended. Petroleum, which has been present in the ground for millions of years, did not become a good until the middle of the nineteenth century, when uses for it were discovered. Aluminum, radium, and uranium also became goods only within the last century or century and a half.

Julian Simon points out that it's the human mind applied to nature that is the ultimate resource. It's the human mind applied to production that transforms what nature provides into "goods" for human use: in other words, it's the mind itself that produces resources from the raw materials around us. As George Reisman and Ludwig von Mises point out, the idea that resources are running out "comes true only under socialism" -- only under a system in which private property is banned, production is strangled, the tragedy of the commons remains in effect, and (crucially) price signals that indicate the real value of resources are ignored or muzzled. Let George explain.

The value of goods is within us—within human beings—and radiates outward from us to external things...

Thus, in one sense ... the contribution of nature is zero. Practically nothing comes to us from nature that is ready-made as a useable, accessible natural resource—as a good in [this] sense. In another sense, however, the natural resources that come from nature—the matter, in the form of all the chemical elements, known and as yet unknown, and energy in all of its forms—are virtually infinite in their extent. In this sense, nature’s contribution is boundless...

And this brings me to what I consider to be the revolutionary view of natural resources that is implied in [this] theory of goods. Namely, not only does man create the goods- character of natural resources—by obtaining knowledge of their useful properties and then creating their useability and accessibility by virtue of establishing the necessary command over them—but he also has the ability to go on indefinitely increasing the supply of natural resources possessing goods-character. He enlarges the supply of useable, accessible natural resources—that is, natural resources possessing goods-character—as he expands his knowledge of and physical power over nature.

The prevailing view, that dominates the thinking of the environmentalists and the conservationists, that there is a scarce, precious stock of natural resources that man’s productive activity serves merely to deplete is wrong. Seen in its full context, man’s productive activity serves to enlarge the supply of useable, accessible natural resources by converting a larger, though still tiny, fraction of nature into natural resources possessing goods-character. The essential question concerning natural resources is what fraction of the virtual infinity that is nature does man possess sufficient knowledge concerning and sufficient physical command over to be able to direct it to the satisfaction of his needs. This fraction will always be very small indeed and will always be capable of vastly greater further enlargement.

In a free and unhampered market, the production of resources once discovered are coordinated and harmonised by the price system. Produce too much and prices go down, making further production uneconomic. Produce too little, and not only do we get headlines saying we're running out, but (if the politicians have left it free to operate) the price system tells producers that it's time to explore new fields, to bring previously uneconomic fields back into production, and (if prices really go stratospheric) to explore substitutes for these resources that are becoming uneconomic.

If it's left unmeddled with, it's the price system itself that provides the motivation for production, for conservation, for exploration and for exploitation; not the maunderings and witterings of Gaia worshippers and economically illiterate politicians who only help to make things worse.

28 comments:

Peak Oil is utter nonsense and exists in defiance of even the most basic ideas in economics. It is sad that this wrongheaded idea persists and is popular enough to have political clout.

Its purpose seems to be to convince everyone to transition away from oil faster than available reserves and technology would otherwise permit. In other words, to artificially exacerbate the very problem its protagonists complain about.

Put another way, Peak Oilers think it would be better to leave oil in the ground for our much wealthier decendants to exploit than to use it ourselves.

The fact is thee is thousands of years worth of oil in the ground right now, much of it in tar sands, and these are economic at present oil prices.

In view of that, the Peak oil movement is reduced to arguing that in the next few years, short term refining capacity constraints mean capacity is likely to top out while new systems come on line, and during that period prices will spike. What like nearly US$100/barrel? Big whoops - we're there. Is the world going to hell? Far from it.

It would not be an issue to be surrounded by such idiots if they were proposing only to limit their own use of fuels given their beliefs.

Peak Oil also relies on the deepest misunderstanding of markets and of incentives. Actually markets do take account of forthcoming shortages, because not to do so leaves money on the table. Why give your product today for $1 if you anticipate getting $2 tomorrow?

Elijah: “If people are genuinely serious about reducing Oil prices...start drilling in the Arctic National Wildlife Refuge.”

Better still, ban all SUVs. Cuts out the middle man, it’s easy, cheap and above all, gives the environment an even break. Everyone wins, especially the former SUV owners, who will discover the joys of walking and public transport.

Environmentalists, peak oilers, climate doom-sayers and porn promoters should get consistent and stop using petroleum based technology. After all they are the ones claiming these things are wrong. This is no time for hypocracy.

See? Ban SUVs, a call made in complete ignorance of the fact that SUV owners bear the full cost of their greater consumption. And not just the cost of the gasoline; the taxes put on top of that already internalise the external environmental costs.

Apparently, turning the environment into a "moral issue" permits complete abandonment of reason to be replaced by arbitrary rantings by anybody with a grudge against inequality or corporations or capitalism, which has nothing whatsoever to do with the environment.

Problem isn't availability of Oil, it's availability of Cheap Oil, and while I agree on the comparisons with stone age, steel, and all of that, the thing now is our global economy worldwide has evolved to the point of being solely based on the "cheap energy is available assumption". Transports, overseas manufacturing, food, most of this relies more than heavily (and irreversibly?) on cheap oil. With a $200/barrel, the global economy would take a big hit, and it's very unsure how well the economic system, banks and everything all the way down to the average human being can handle that. When most won't be able to afford basic stuff for living, that's the beginning of a collapse.

How much time to turn to new technologies when the shxt hits the fan?

I'm no doomsayer, but there are still some reasons to be extremely worried. I am.

If oil prices were to get to $200 a barrel, then as I say in my post, the high prices themselves would provide more than sufficient motivation for increased for greater production and refining capacity, for a higher take-up of conservation measures, and (significantly) for greater exploration of new fields, for increased exploitation of existing fields, and for the removal of the iniquitous taxes on petroleum that politicians everywhere have slapped on this product that, as L'Alex identifies, is at the heart of our present industrial system.

(When you identify that oil is at the heart of our modern industrial economy, then you may readily identify the true motivations of those who support high taxes on petroleum and on oil production and refining.)

Now, if oil prices really were to approach $200 a barrel, then not only would we get headlines screaming "we're running out" and pictures of Sue Kedgeley and Jeanette Fitzsimplesimons on bicycles contaminating the front pages of our daily newspapers, but more importantly (if the politicians have left it free to operate) we would also see that these price signals are telling producers that it's time to explore new fields, to bring previously uneconomic fields back into production, and (if prices really go stratospheric) to explore substitutes for these resources that are becoming uneconomic.

It doesn't just tell producers, it provides abundant motivation, and more than sufficient capital.

If for example you've got a field which is uneconomic at $50 a barrel but which becomes economic at, say, $100 -- or $150, or $200 -- and there are literally thousands of these -- than as prices rise these previously uneconomic fields can come into production.

This is the way the unhampered market works -- the workings of which seem to entirely escape the screaming misanthropists.

Such is the elegance of unhampered price signals -- far more elegant than the 'signals' that emanate from these screaming misanthropists chanting "Give up," "Renounce," "Surrender."

I'm by no means an admirer of Murray Rothbard, who was both intellectually lightweight and professionally dishonest, but Peak Oil pessimists and 'we're-running-out-of-everything' weekend warriors might like to reflect on Reisman's point that it's only possible to complain that we're running out of resources if you misunderstand how markets work.

Said Rothbard:

"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a 'dismal science.' But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance."

PC: “I've always known them as 4WDs, and they're usually driven by people who mind their own fucking business.”

Perhaps, but technically, not all 4WDs are SUVs -- for example, some models of Subaru and Audi. I can see a difficulty with definitions brewing. At this point, we should probably repair to an expert, in this case Miss Ayn Rand, who developed a theory for occasions such as this.

I think one could say with a high degree of contextual certainty that the conceptual common denominator of ‘SUV’ is ‘rich, selfish bastard’. That leaves off the hook essential services, government work and NGO activity in developing countries. That seems fair – the greatest use for the greatest need. Ban all the rest, and no need for wasteful, expensive pipelines.

However, my comments were not so much about SUVs as Elijah’s cavalier support for drilling in an Alaskan wildlife park. He made scent reference to the polar bears – in fact, he studiously evaded the subject. That glaring omission is very revealing of his state of eco awareness.

“And take Al with you -- he looks like he needs the exercise.”

Good point. They don’t call the former vice-president and Nobel prize-winner “Big Al” for nothing. He needs to curb scoffing those dunkin’ donuts on Air Force One.

L'Alex, what is the point in being worried? The one prescription for dealing with oil future oil prices is not to articially raise the price even more by regulating and further raising the price for oil access. Prices are already far higher than they were before and that has stimulated heavy private investment in alternative fuels, and heavy investment in access to more costly sources of oil.

Your worry - which I take to mean your propensity to regulate - cannot possibly improve the situation. You accelerate the transition to more costly alternatives, leaving less costly oil sources in the ground. How exactly does that help the problem?

If your concern is that oil will some day run out and that without regulation, no preparation will have been made, you are woefully mistaken. For one thing, that means individuals, companies and governments will have all ignored a very, very large profit opportunity that occurs the day after oil depletion. For another, the last drop of oil will have very high value, making alternatives cheap by comparison and therefore profitably supplied and therefore widely available. And one more: that imaginary day of depletion is thousands of years away.

You could always say, as George Reisman frequently points out, that it's either the polar bears or us.

You could say that if you're opposed to war, and you're opposed to financing the corrupt Saudi regime, the bankrollers of Wahaabi terrorists, then you should be opposed to the present dependency on Saudi oil.

You could point out that "Today, it is possible once again to bring about a dramatic fall in the price of oil – indeed, one even larger than occurred in the 1980s. And it could begin right away. All that is necessary is to abolish the U.S. government’s restrictions on domestic energy production inspired by the environmentalist movement.”

You could also point out, as George Reisman does so simply, that "oil prices would be lower if the supply of oil were greater. The oil companies, including Exxon Mobil, have been doing their utmost to increase the supply of oil, including reinvesting a major portion of their profits precisely for that purpose. But time and again, they have been prevented from increasing the supply of oil by the environmental movement and the maze of governmental regulations and prohibitions that it has inspired."

Actually the biggest impediment to Exxon, BP and the like is not environmentalism but resource nationalism. Something like 70% of reserves are held by national oil companies and the global oil companies are excluded from their exploitation.

There has been a concern that that has resulted in less efficient extraction as traditionally Exxon etc have had an advantage in technology, but the rise of third party drilling technology companies like Schlumberger means that is less of an issue. More is probably an unwillingness to invest and inability to recognise where there are opportunities for the application of new technology.

I'm not worried about ever running out of oil, I'm worried that its price will keep going up to the point it's hardly affordable and affects the very stability of the global economy. We'll probably still be able to afford to pay for oil to fuel our lives, but what about countries already on the edge of bankruptcy, poor and developing countries. I think that's enough to create more tensions, conflicts, etc...

Without being a supporter of Al, I'm still aware that there is an environmental price as well for these new reserves, and some environmental constraints to deal with. No one wants pollution on its doorstep, an other driving force for conflicts.

So what's the point in being worried, compared to just ignore this and keep partying until dawn? First, it doesn't mean I'm sad and on the edge of suicide every day, just being aware of potential troubles ahead helps thinking about alternative routes, alternative decisions, and maybe when the party will be over, the hangover won't be as bad.

PC points out the bizarre logic behind Peak Oil. The very same people who say the sky is falling because of high prices only want to make them higher by their rules and regulations.

I can understand the logic from the environmentalist's perspective: create (or exacerbate) a problem then sell a solution - never mind the lack of logic in it, what matters is the people actually buy it - that creates political power and control.

That, folks, is environmentalism. The environment is the excuse, and reason is applied selectively. Both are abandoned as required. The purpose is control.

Now you’re sounding like a Japanese war movie, Elijah. Don’t get me wrong. I’m all in favour of capitalist transactions, provided they generate taxable income.

“With regards to New Zealand, our Oil fields in the Southern Basin contains 100 years of our oil requirements...(not to mention Taranaki and the East Cape regions)”

I’m with you in rejoicing at New Zealand’s good fortune. This discovery will be a boon to our country as long as we can extract a proper amount of the proceeds in tax for the benefit of all New Zealanders. With any luck, we’ll be able to revive the tax and spend programmes of the early years of the Labour Government, when we sent our budding young artists overseas to soak up the atmosphere of exotic climes.

"We should pay $200 per barrel and go without this massive supply of oil because otherwise a polar bear or two may get upset"

That won’t happen as long as ban SUVs, apart from the exempt groups above, and now that I think of it, honest tradesmen and farmers. We might also have to trade down car size a bit too. I saw this great little Daihatsu in the car yard today, fairly snug, but what a mileage! And quite sprightly too, a guaranteed top speed of 150 k on the flat.